Cryptocurrencies: more than a token effort

Vladimir Smerkis of The Token Fund.

By Cy Leclercq in MoscowOctober 25, 2017

Cryptocurrencies are set to take the world by storm and what was once written off as a novelty is finally finding a foothold. Eastern Europe has emerged as the surprise hub of this fledgling industry, and Vladimir Smerkis of The Token Fund has found himself firmly at its centre.

Smerkis is the former vice president of international development at Mail.Ru, one of Europe’s largest Internet holdings. Heavyset with a trim dark beard, he sits deep in thought behind his desk in Moscow and would cut a rather imposing figure if it weren’t for his jovial demeanour.

“I really did enjoy my time at Mail.Ru,” Smerkis says warmly. “Somehow they do still manage to innovate, which is extremely rare for a company of that size. But after we launched My.com, its global subsidiary offering games and Internet-related services and products, I felt like the best part of my work was over. I needed something new, so I decided to strike out on my own.”

It was about this time that the mainstream media began swarming around Ethereum and its founder, Vitalik Buterin, he says, adding that “society had finally started to accept blockchain.”

Attracted to the technology due to the market’s trillion-dollar potential and his years working in IT and technology, Smerkis started investing his personal funds in cryptocurrencies.

Before long, in March 2017, he and a team of likeminded blockchain enthusiasts developed a cryptocurrency exchange system, The Token Fund, one of the first coin-traded funds on the market. It acts as a managed investment fund for cryptocurrency and blockchain projects and provides the service that many investors are seeking: a painless entry into the crypto-world that comes with a diversified portfolio and doesn’t require constant manoeuvring on exchanges. The model proved successful, fast. Hedge funds and investors worldwide, “from Switzerland to Kazakhstan,” Smerkis says, began reaching out, asking to white-label the system for use on their local markets.

The feedback got him thinking. As opposed to licensing the software out to foreign investors and institutions, he asked himself, why not just build a turnkey platform for international users? That is exactly what he plans to do. The global platform, Tokenbox.io, will launch after a funding event scheduled for next month that Vladimir has dubbed a “Token Generation Event”.

The turnkey solution will be built on the Ethereum platform and provide portfolio managers and traders with a simple way to adopt a token-based trading system. It will also offer a comprehensive system designed to supply all the requisite trading and compliance infrastructure to easily create new investment funds specialising in the fast-evolving cryptocurrency asset class.

“It will also perform KYC/AML on investors on the trader’s behalf and manage mutual settlements with smart contracts,” Smerkis says. “Increased security, reduced transaction costs, built-in analytics and algorithmic trading are added bonuses. We have a fantastic group of guys from Zerion Software working on the technical side of the platform.”

Could tokens simplify cryptocurrency?

Smerkis and his team have developed the bare bones of a blockchain system that can unite disparate cryptocurrencies that have confused savvy investors for years. This new system could provide a stable trading platform that can be copied around the world to create a series of crypto-asset funds that will bring trust, and big investment.

“What we have is the embryo of disruptive, decentralised technologies that will take cryptocurrency from society’s fringes into the mainstream,” he says. “The Tokenbox platform is the first viable solution to bring investors and cryptocurrency funds together.”

With interest in cryptocurrencies hitting fever-pitch, consumers need an instrument that can ensure the effective management of private and institutional investors' assets and enable the wider audience to enter the market. So far, no one has come up with a secure and stable platform.

“And that’s exactly what we intend to do,” Smerkis says.

Are national cryptocurrencies the next step?

At some point sooner or later, the hundreds of cryptocurrencies in circulation today will undergo consolidation. Bitcoin has become a benchmark currency and is unlikely to fall by the wayside. But some smaller coins will probably be replaced by sovereign coinage — cryptocurrencies issued by central banks. Russia, Japan, Iceland and other countries are already contemplating their own sovereign coins.

“The cryptocurrency trading system is still in its nascent stages,” Smerkis says. “We will see considerable developments in the next couple of years.”

As the system evolves, tokens will start playing new roles, too, he adds. They could be offered publicly and used to represent shares and even voting rights. But regulation is needed first, and Smerkis is the first to admit that the industry has a long way to go.

Cryptocurrency traders need to be convinced to embrace regulations that will bring the big money, and turn the likes of Bitcoin into a self-fulfilling prophesy, he says. But solid trust management ecosystem software is a huge step in the right direction, and the Tokenbox platform could help drive forward industry needs.

Ukraine and Estonia aim to be leaders

Although Russia is really working hard to be a leader in blockchain, Smerkis says, it’s not alone. All of Eastern Europe is emerging as a powerhouse in the cryptocurrency market, to mirror its recent explosion in tech startups. Ukraine, alongside the UK, is arguably at the head of the pack right now and its largest private bank, PrivatBank, has provided Bitcoin services since late 2015.

The Bitfury Group is also now working with Ukraine to put a vast amount of government data and services on blockchain systems. Ukraine also saw the first official cryptocurrency real estate transaction, when TechCrunch founder Michael Arrington purchased an apartment in Kyiv.

Meanwhile, Estonia, Europe’s longstanding e-government services leader, introduced digital residency back in 2014 and has pursued the tech line ever since. With limited legacy systems, it has adopted blockchain and a digital economy with relative ease. Estonia has a Blockchain-based voting system and the government was working with Buterin to create the “Estcoin”.

Buterin, Smerkis says grinning, is something like a young cryptocurrency prophet, embraced by governments as he travels the world to create a freer, securer global economic system. “But all kidding aside, he really has a tremendous mind,” he says. “If it were not for Ethereum, the future that we see today for blockchain and cryptocurrencies wouldn’t be so bright.”

What is Ethereum?

Buterin’s Ethereum is a step forward from Bitcoin. The Moscow-born Canadian citizen and university dropout developed his own “decentralised mining network and software development platform” with the help of a $100,000 grant.

While Bitcoin is simply a digital currency, Ethereum is more than that. It’s a currency with software attached, which provides smart contracts. These programmes can trigger transfers when certain conditions are met, which takes the human element out of a contract and should make trading and business simpler.

“Ethereum totally changed the game,” Smerkis says. “Bitcoin was a great start, but it’s just one currency. It’s like a dollar, and that is great in Los Angeles, but useless in Tokyo. Ethereum gives anybody the chance to create their own currency and we think it’s going to change the world.”

Ethereum is already in use in Germany with a real estate company, and it could easily become the building block for state cryptocurrencies.

The Estcoin could be the first government-backed cryptocurrency, if the government can negotiate the thorny issue of the European Central Bank.

Estonia can technically only use the euro as its currency, Smerkis says, as it is a member of the EU. “This creates certain difficulties, he adds. “But with the rapid advance of cryptocurrencies, either Europe will have to get with the programme, or Estonia will have to look for a loophole.”

As the country’s residency and business records are already powered by blockchain, it’s easy to see a future where companies do business in Estcoin. There would always be a record, and this could simplify taxes and ensure that everybody pays their dues.

Estonia’s future plans, then, are a world away from the Bitcoin miners we have today. China has banned Bitcoin altogether, and throughout the developed world there are constant rumours of money launderers, tax evaders and even organised crime using Bitcoin due to its anonymity.

While Estonia and Ukraine are big players in the cryptocurrency market, they are still relatively small fish in the global economic pond. But a shark is cruising into the picture.

Russia is coming

Russia has embraced cryptocurrency in a big way and President Vladimir Putin has made it his mission to turn the country into a world leader in the blockchain economy. The “CryptoRuble” is on the way, together with a cryptocurrency bill that is aimed at protecting buyers and sellers.

Putin personally invited 23-year-old tech superstar Buterin to join him at this year’s St. Petersburg International Economic Forum, and did not hold back with his praise for a digital economy.

“Ethereum is the potential tool to help Russia diversify its economy beyond oil and gas,” Putin said. “The digital economy isn’t a separate industry, it’s essentially the foundation for creating brand new business models.”

So, the revolution is coming and the naysayers suggesting that the likes of Bitcoin are a novelty that could come crashing down seem to be simply wide off the mark.

“It is true that cryptocurrencies will change beyond all recognition,” Smerkis says. “But only in the sense that they will become a normal part of our daily lives. And we’re seeing this phenomenon slowly take shape across the world. Governments are embracing it.”

Beyond Russia, Sweden is testing a blockchain-based land registry, Dubai wants to control its entire government with blockchain technology by 2020 and China is keen on a distributed ledger system even though it has banned Bitcoin. Georgia has already moved its land registry on to blockchain, and even the National Bank of Kazakhstan is now getting in on the action.

Transparent and secure

Smerkis says blockchain is attractive for two reasons – it’s transparent and secure. Everyone with access to the blockchain on the P2P network can see every transaction through the mining process and each transaction must be verified.

“These ledgers are secure, because there is no real administrator. There’s no way a third party can break into the records and it would take huge resources to falsify them,” he stresses.

Blockchain has come a long way since Satoshi Nakomoto created Bitcoin1 in 2009. This new payment system offered total anonymity thanks to blockchain, which is essentially a ledger that keeps records of all transactions at a P2P level. The information is encrypted so that it offers total privacy, while reliably handling the transaction.

Although the Wild West gold-rush days have come to an end with Bitcoin, Smerkis says, business is still booming. Indeed, in the first six months of 2017, cryptocurrency trade increased more than 10-fold to $5bn. The total market capitalisation of all cryptoactive assets increased from $18bn to more than $110bn.

Payspace magazine claims that 41 million people now have a Bitcoin wallet, while more conservative estimates put the number closer to 10 million. Either way, it’s clear that active Bitcoin users are on the rise and 80 stock exchanges already trade in cryptocurrencies.

“The growth is impressive, but cryptocurrencies are simply not reaching their full potential,” Smerkis says. “The Token Fund has really taken off, and we’re sure our new Tokenbox platform is the right approach. But we need to get our cryptocurrencies ecosystem up and running in several different countries at the same time. That’s the theory behind what we’re doing.”

Traditional funds work with tokens

Smerkis’ Tokenbox will aim to help anyone — from major institutional investors to informed, qualified individuals — create a new fund taking stakes in either cryptocurrencies or crypto-based businesses. All investors will be able to select from a vast variety of crypto-portfolios on the Tokenbox platform.

It will also provide a gateway to the cryptocurrency world, where investors can trade fiat currencies for cryptocurrencies or tokens. Tokenbox will even come with built-in analytics that can recommend trades and provide trading advice based on the specific currency’s recent performance.

The Token Fund officially launched in March 2017 and now the capitalisation of assets exceeds $2mn, with a first quarter US dollar yield exceeding 227%. Smerkis believes that Tokenbox will swiftly surpass the fund’s capitalisation, and is aiming for about $800mn in accumulated crypto-assets under the management of the funds registered on the platform by Q4 2018.

Cryptocurrency is a vast and confusing field, but Smerkis’ token-based system could be the glue that binds it all together. It could be the driving force that takes this Eastern European cryptocurrency revolution to the next level and brings cryptocurrency into the mainstream.

As Russia moves towards digitization, security concerns have arisen due to the failure of government agencies to foot the security bill in timely fashion.

Everyone is on board. Digitisation has been made a top priority of the government that has already transformed the tax service so that a cosmonaut paid his taxes from space last year. Russia's economy is going online.

As labour markets tighten across CEE, economists say the best outcome for the region is for companies to respond to worker shortages by investing into new technologies.

Russia has refused to discuss with a high-level delegation from Minsk possible ways of compensating Belarus for its multi-billion losses from the so-called 'tax manoeuvre' in the Russian oil sector that will effectively cut energy subsidies to Belaru

Interest in Russian equities is picking up again as the economy recovers and earnings rise again, but the number of brokers is shrinking. The pie is getting smaller, but the pieces left have to be shared with fewer people.

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